Stephen Hayden - Page 2

                                        - 2 -                                         
                                                       Addition to Tax                
                    Year           Deficiency          Sec. 6651(a)(1)                
                    1997           $102,731            $25,683                        
                    1998           $ 26,347            $6,587                         
               After concessions by the parties,2 the issue remaining for             
          decision is whether disability benefits received by petitioner in           
          1997 and 1998 from UNUM Life Insurance Co. of America (UNUM) are            
          excludable from his gross income pursuant to section 105(c).  For           
          reasons set forth herein, we hold they are not.                             
                                     Background                                       
               The parties submitted this case fully stipulated, without              
          trial, pursuant to Rule 122.  The facts stipulated by the parties           
          are so found.  The stipulation of facts and the exhibits attached           
          thereto are incorporated herein by this reference.                          
               When the petition in this case was filed, petitioner resided           
          in Carson City, Nevada.  From 1991-94, petitioner was employed as           
          the chief executive officer of Calera Recognition Systems                   
          (Calera).3                                                                  
               In August 1991, Calera contracted for a group long-term                
          disability insurance policy through UNUM (the UNUM policy) for the          
          benefit of its employees.  Under the UNUM policy, UNUM agreed to            


               2    Respondent concedes that petitioner is not liable for the         
          addition to tax under sec. 6651(a)(1).  Petitioner concedes that he         
          failed to report properly a $14,677 State tax refund for 1995 as            
          income on his 1997 Federal tax return.                                      
               3    Calera ceased conducting business sometime in 2000.               





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